Nationwide: House prices edged down in January

“January’s data does little to alter the picture of a sluggish market that has been evident since the summer. Indeed, the three month on three month measure of house prices, which is a better measure of the underlying trend, showed a fall of 0.5%, consistent with the gradual moderation in prices that has been in place since the summer of 2010.

“The outlook is still highly uncertain, but the most likely outcome is that the pattern of low transaction levels and prices moving sideways or modestly lower will continue through 2011.

“Demand for homes looks to have stabilised, albeit well below the levels prevailing before the crisis. Interest rates remain at historic lows, and labour market conditions have stabilised – both factors that will provide support to the market. However, the continued uncertain outlook for the economy will probably continue to keep many buyers on the sidelines.
“At the same time, there are few signs of a glut of unsold homes building up on the market that would lead to a sharper price correction. Indeed, there are tentative signs that the volume of homes coming onto the market may be slowing.”

“Consumer Price Inflation (CPI) was stronger than expected again in December, maintaining what has become a familiar pattern over the last two years. Indeed, CPI was stronger than expected in 16 of the past 25 months, and looks set to remain well above its 2% target throughout 2011 as a result of changes in indirect taxes and strong growth in food and commodity prices in global markets.

“This has led some to question what this is likely to mean, if anything, for the housing market.

“High inflation readings reinforce the notion that the housing market is likely to remain sluggish in 2011. The main reason is that high consumer price inflation is squeezing household budgets, as wages aren’t rising fast enough to keep up. For example, in the twelve months to November, prices increased by 3.2% on the CPI measure, but average wages (including bonuses) rose by just 2% over the same period.